US Fed’s hawkish outlook on rates spooks markets

US Fed’s hawkish outlook on rates spooks markets


The US central bank’s revision of the terminal rate, the rate that will prevail at the end of the policy tightening cycle, to 5.1% from 4.6% in September, along with the lowering of its growth forecast for 2023, had a negative impact on market sentiment.

The Sensex sank 1.4%, and Nifty fell 1.32% on Thursday, as investors trimmed their equity exposure.

The Fed startled the market by maintaining its hawkish tone, as investors were expecting a softer approach after the easing of US inflation numbers, said Vinod Nair, head of research at Geojit Financial.

Information technology stocks came under intense selling pressure as the Fed’s comments led to fears that Western economies may soon tip into a recession. Cyclical stocks such as metals, real estate and banks also saw selling pressure.

Hemang Jani, head of equity strategy at Motilal Oswal Financial Services Ltd, expects the Fed to pause interest rate hikes only by mid-2023 and interest rate cuts may not happen before the start of the following year.

“Notwithstanding some initial signs of a weakening economy, the Fed continued to worry about a strong labour market. Interestingly, although growth projection was revised down (to 0.5% from 1.2%) for CY23, the unemployment rate revisions were only marginal (4.6% to 4.4%),” Jani said.

The rupee continued to remain under pressure despite lower crude prices. The currency closed 30 paise, or 0.37% weaker, at 82.76 to a dollar on Thursday as the dollar strengthened.

“The rupee continues to remain one of the weakest currencies as demand for dollars remains strong in the onshore market and lack of exporter selling and carry trades keep supply low,” said Anindya Banerjee, vice-president of currency derivatives and interest rate derivatives at Kotak Securities Ltd.

Over the near term, Banerjee expects the currency to be in the range of 82.25 and 83.00 against the dollar on the spot market.

Foreign portfolio investors (FPIs) net-sold 710.74 crore worth of equities on Thursday, putting additional pressure on the rupee.

The Fed’s hawkish tone could induce further bouts of profit booking in the market, experts said.

“The odds of a deeper-than-anticipated recession next year in the US have shortened, as sustained rate hikes could end up hurting growth in more ways than one,” said Andrew Holland, chief executive of Avendus Capital Public Markets Alternative Strategies LLP. “More flows are moving into fixed income, especially with riskier assets such as equities turning more volatile. As a result, the Nifty could test the 17,000 level over the next few months, with the upside capped at the record high at the beginning of the month.”

Holland recommends that investors through mutual fund systematic investment plans continue their periodic investments while allocating incremental monies to fixed income as yields at 8% make bonds an attractive proposition.

The rise in US interest rates makes the carry trade for short-term money less attractive.

FPIs who turned net buyers of Indian shares last month and so far in December could look to book profits from hereon as valuations suggest Indian equities are costly, said experts.

Net sales of FPIs till 14 December stood at $16.75 billion against net purchases of $3.76 billion in 2021.

“We expect that valuations could turn attractive at 17,700-18,000 levels of Nifty, which the Nifty could test by the month’s end,” said Shrikant Chouhan, head of research retail, Kotak Securities.

Experts said the drop in crude and commodity prices could benefit sectors such as cement, consumer goods, automotive, and speciality chemicals by boosting margin expansion and aiding earnings growth. Besides, the banking index would play a critical role in setting the tone while others are showing a mixed trend, said experts.

Meanwhile, participants should restrict leveraged positions and maintain a few shorts, said Ajit Mishra, vice-president of technical research at Religare Broking Ltd.

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